Fed leaves the door open on June hike

The US Federal Reserve’s decision to keep rates on hold yesterday was widely expected, but the central bank could announce a hike in June, says State Street Global Markets.

The Fed’s Federal Open Markets Committee (FOMC) held the target range for the federal funds rate at 0.75-1 per cent at their most recent meeting on 3 May 2017.

“The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labour market conditions and a sustained return to 2 per cent inflation,” the Fed said in a statement.

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State Street Global Markets head of multi-asset strategy for North America Lee Ferridge said this decision was unsurprising.

“As was widely expected, the FOMC left US rates unchanged at its May meeting, but left the door open for a move in June,” Mr Ferridge said.

“Prior to the meeting, the market had estimated a 60 per cent probability for a June hike and that is unlikely to change materially following this announcement.”

Mr Ferridge said economic data released in coming weeks would be “key” to the FOMC’s rate decision in June, but noted its members will be “closely watching Washington” for developments in tax reform negotiations.

“Should the data hold up, or better still, improve from here, while the chances of a late summer tax cut agreement remain intact, then the market will likely price in a June move,” he said.

“A hike in June would be the second of the three that the Fed tells us it is likely to deliver in 2017.”

However, Man FRM noted that other central banks, such as the European Central Bank and the Bank of England, also appear poised for a “change in the direction of travel” regarding policy, which could create risk globally.

“We believe central banks will taper and raise rates with caution, little by little, and not be afraid to reverse course if necessary, but the combined effect of all central banks turning could be uncertain in the extreme,” the investment specialist said.

“In our view, economists have for too long been able to ignore the lack of productivity gains since printing money has no downside in a period of sluggish growth.

“The balancing act between stifling the recovery through normalising too quickly and allowing inflation to get out of control would be hard enough for a single central bank, but for a range of central banks to deal with this problem in concert could be a recipe for mistakes and uncertainty.”

Man FRM said confidence in the central banks to “do the right thing” could be shaken and risk assets will subsequently be affected.

“This is important for risk assets, since the most obvious explanation for the potential over-valuation of equities is the amount of cash pumped into the system by the central banks since 2008,” the company said.